Infra Debt Fund (IDF) - Mutual Fund & NBFC

The Finance Ministry is all set to take the draft
tripartite agreement for the infrastructure debt funding mechanism to the
Cabinet. The Cabinet approval will pave the way for operationalising the
mechanism.

Finance Minister said, “The infrastructure
debt funds note will go before the Cabinet shortly and we will announce that
after it is approved.” The proposal for such a fund was announced in the
2011-12 Budget. Such a fund aims to attract big-ticket investments for large
infrastructure projects.

Earlier, a senior Finance Ministry official said the model
agreement is the key to operationalising the funding mechanism. This will
provide arrangement between the borrowers, the lenders and the proposed Infra
Debt Fund (IDF). Once this agreement is in place, the IDF will take over a part
or the whole of credit given. This will release funds for the banks and the
financial institutions so that they can lend to others.

According to Government norms, the IDF can be set up
either as a trust or as a company. In the former case, it would normally be a
mutual fund (MF) and in the latter, an NBFC. In the form of a Non-Banking
Finance Company, the IDF would raise resources through issue of either rupee or
dollar denominated bonds of minimum five-year maturity.

The investors would primarily be domestic and off-shore
institutional investors, especially insurance and pension funds that have
long-term horizon.

A mutual fund IDF would be regulated by SEBI, while an
NBFC IDF would be regulated by the RBI. The market regulator, SEBI, has already
issued detailed guidelines for creating a mutual fund IDF.

Such a mechanism is intended to assist infrastructure
projects get sustainable and cost-effective, long-term financing. Though banks
have traditionally been supplying credit, they are unable to provide long-term
funding given their asset-liability mismatch. Moreover, banks are also near
their exposure limits for the infrastructure sector.

It is expected that IDFs through innovative means of
credit enhancement will provide long-term low-cost debt for infrastructure
projects by tapping insurance and pension funds that have hitherto played a
comparatively limited role in infrastructure financing.

IDFs are also likely to help in strengthening the rupee,
as the funds will attract foreign investments pushing up dollar inflows. The
rupee continued to gain, appreciating to Rs 52.40 against the dollar today. The
Finance Ministry expects the rupee to go up 50 level by year end.